Saturday, October 31, 2009

This chart comes from a recent article in The Economist on the amazing decline in worldwide fertility rates. It reminded me of something I wrote over three years ago, summarizing what I thought were the high points in the 2005 book Fewer: How the New Demography of Depopulation Will Shape Our Future, by Ben Wattenberg. The theme of both is similar: fertility rates in virtually all countries in the world have fallen further and faster than anyone could have imagined just a few years ago. World population is no longer exploding, and will soon be shrinking. Here's my summary of the Wattenberg book:

We are only a decade or two away from a new era in human existence: global population will begin to decline.

Not too long ago world population was projected to surge from the current 6 billion to 14 billion or more by the end of this century, creating great strain on the world’s resources, and in part fueling the whole environmental movement. Now, the UN Population Division’s projections have been dramatically scaled back. One plausible scenario shows global population peaking around 2040 at 7.5 billion, then falling to 5.5 billion by 2100. Yet if recent trends in fertility rates continue, these numbers are too high, and global population could peak within a few decades. One long-term scenario projects world population shrinking to only 2.3 billion people by 2300!

The most significant change in global demographics in the past few decades has been a dramatic decline in fertility ratesin almost every country on the planet.

In order for population to remain constant over time, total fertility rates must be approximate 2.1. Every woman must on average have 2.1 children; one to replace herself, one to replace her partner, and a little extra to make up for women who don’t have children.

As recently as 1970, fertility rates in less-developed nations were about 6. They have subsequently collapsed, at a faster rate than anyone could have imagined. Total fertility rates in LDCsare now 2.75, and they are still falling. Fertility rates have fallen faster in LDCs than they ever fell in developed countries.

Fertility rates in Greater Europe have fallen from 1.8 in 1980 to 1.3 today, a level previously thought unimaginably low. Europe is already losing about 700,000 people per year, a figure that will grow to about 3 million per year or more by mid-century. By the year 2050, Europe will have lost about 100 million people; population will likely decline from today’s 730 million to 630 million or (probably) less. If fertility rates and immigration in Europe do not increase from current levels, European population could fall by 130 million by 2050. That’s equivalent to losing almost half the current population of the U.

Europe has about twice the population of the U.S., but only takes in about 376,000 immigrants per year, about one-third as much as the U.S. does. In order to keep its population from shrinking, Europe would have to “import” almost 2 million immigrants per year. If Europe wanted to maintain a constant dependency ratio (retired workers/active workers), annual immigration would need to be over 27 million! The majority of European immigrants are muslims, mostly Arabs. Given current political realities, a significant increase in immigration is extremely unlikely. Thus, significant population decline is virtually certain.

The inevitable population decline that developed countries will suffer will dramatically reduce the influence of “Western” civilization in the world. In 1950, the West represented about one-third of global population. By 2000 this had declined to 20%, due to the population explosion of LDCs. By 2050 the West will shrink to 14% or less. Europe’s share of world population was 22% in 1950, 12% in 2000, and will be 7% or less in 2050.

Good-bye Europe… One demographer estimates that for every 1,000 Europeans in the year 2000, there will be only 232 in the year 2100!

Russiais losing almost 1 million people per year and its fertility rate is only 1.1. Russia could lose 30% or more of its current population by 2050!

Japan’s population will begin to decline within a few years. Its fertility rate is only about 1.3. The number of people 15 years and older will likely stop rising in the next year or two, and it only increased 90,000 in the past year (0.08%). Japan’s workforce peaked in 1998. The number of people employed peaked in 1997 and has fallen by 215,000 since.

Fertility rates have probably alreadyfallen below replacement level in countries such as Mexico,Brazil,and Iran. This was almost inconceivable just a decade ago. South Koreaand Hong Kongare among the countries with the lowest fertility rates in the world: only 1.17 and 1.0, respectively.

The U.S. is the onlydeveloped country in the world that will continue to grow in coming decades; U.S. population will grow by about 100 million (one-third) by 2050. The fertility rate in the U.S. is about 2, and that is by far the highest fertility rate of any modern nation. U.S. population growth will be driven exclusively by immigration.

China’spopulation will grow about 13% between now and 2025, reaching 1.45 billion, but then it will begin to shrink. Its fertility rate is 1.8, despite its “one child” policy.

Indiawill become the most populous country in the world by 2035, and its population will continue to grow, reaching a peak of about 1.5 billion by 2050. India’s fertility rate has plunged from 5.4 in the early 1970s to less than 3 today.

There are about 1 billion Muslims in the world. Fertility rates in Muslim countries have also collapsed. Muslim countries will begin to lose population around 2050. Muslims will continue to represent about one-sixth of the global population.

Government-sponsored retirement schemes are in trouble. The problem is a combination of increased life expectancy and a baby bust. Populations in all developed countries will be aging dramatically in coming years. The median age in the U.S. in 1950 was 30; by 2000 it was 35; in 2050 it will be 40 or more. The median age in Europe in 1950 was 29; in 2000 38; in 2050 it will be 48 or more. Japan will age even more dramatically: 22, 41, and 53.

The easiest solution to the problem of a population bust is more immigration. But the competition for immigrants, currently just 3% of global population, may intensify in the future, especially since fertility rates in those countries traditionally supplying most of the immigration for Europe and the U.S. are falling dramatically. Another solution is for people to retire at much older ages. (My view: this is probably the only feasible solution.)

When populations cease growing and start shrinking, economies become more like a zero-sum game. To increase your share of the wealth pie, someone else has to accept a smaller share. Construction doesn’t open new expanses of land to development, it mainly concentrates on replacing and improving existing structures. Productivity becomes thekey to growth.

If real economic growth in Europe approaches zero (a shrinking labor force offset by positive productivity gains), must real yields on inflation-linked bonds also approach zero? (If real yields are not equal to or less than real growth, then inflation-linked bond returns will equal or exceed nominal growth, and that poses competition to equities, since earnings growth on average is limited by nominal GDP growth.)

Demographic trends are already influencing differential growth rates in the U.S., Japan, and Europe, and this will only intensify in coming years. If you were a member of an aging Japanese or European economy with minimal growth prospects, wouldn’t you prefer to invest your retirement funds in the biggest, most modern economy in the world, especially since it is virtually guaranteed to be the only one to grow significantly over the balance of your lifetime? Doesn’t this help explain why the U.S. has a persistent and growing current account deficit? By this same logic, capital inflows to India and China could be intense in coming years; it seems virtually certain that the world will have only three main economic enginesin coming decades: the U.S., India, and China.

23 comments:

Not a very optimistic future for the world. Perhaps we'll be surprised by a technological innovation and these predictions of world decline will turn out much the same as Malthus' predictions of mass starvation long ago.

Your comment is interesting, since I assume that the environmentalists would see this outlook as very encouraging. Also, population decline does not mean falling living standards. If anything, it might take so much pressure off the world's resources that they could become cheaper and that in turn would significantly raise world living standards.

Perhaps this trend would lead to global cooling with the decrease in fossil fuel usage caused by declining birth rates and eventually declining population rates. Hmmm...I suppose, though, if there is a downside Huffington will find it and blame it on Bush.

By the way, it is only logical that the population of the US will rise: free health care and money to buy homes and cars for anyone in the country would attract lots of new friends I haven't met yet. I'll turn on the porch light and put on some coffee!

It would be interesting to compare government child incentives/credits to birth rate statistics.

I read a report once (unfortunately can't cite it) comparing tax credits in 1940s and 1950s to what they are now and it was much more attractive to have a large family then compared to today, thus the baby-boom generation.

“Government-sponsored retirement schemes are in trouble. The problem is a combination of increased life expectancy and a baby bust.”

The Author does pick the correct terminology when using the word “scheme”. In other words, the Author is pointing out that the decline in population growth (contributors) along with an extended life span (recipients) further exposes the ultimate Ponzi Scheme which is Social Security.

In the Socialize Medicine “Scheme”, socialists are pushing a 2 to 1 pricing scale which will raise younger people’s premium that in effect subsidizes an older person’s premium. This scheme too would be affected by declining population. The pricing mechanism in conjunction with shrinking population growth would cause the younger group to experience steep future price increases.

The data should give the banks and builders something to think about along the lines of "new" construction projects. Maybe there is some merit to bringing out the bulldozers to take care of the current oversupply as it does not look like previously assumed population growth will likely absorb either the existing or future supply of houses or the need for more shopping centers (the internet will likely keep beating that area up anyway!) Plus...just think about the sea of vacant McMansions that 2 to 4 person households have no need for now and even less need in the future. And, Social Security...this data seems to endorse the concept of "as soon as you are eligible" start drawing immediately and... forget the strategies you read about regarding delays to take advantage of higher benefits as that does not look real promising. Scott...Thanks for the link to the report. age)

A partial solution (in the US at least) is to increase the tax deduction for having children. Currently there is a $1000 per child tax credit but if this was increased to $5000 and made into a deduction rather than a credit (i.e. no free money for those who do not pay taxes) this would encourage the better educated and financially successful members of society to have more children.

Scott, why would the economy look like a zero sum game with a constant or falling population? I think this is an erroneous way of thinking about economic growth. Also, let's not make the mistake that the population growth alarmists made -- thinking that current trends can be projected into the indefinite future. This fall off in fertility rates could certainly turn out to be temporary.

I think governments ought not to "solve" this problem along with everything else in the world. In fact, I suspect that government policies which are defacto replacements for the family are the principal cause of this latest crisis.

Cabodog: Both the article and the book explore possible reasons for declining fertility. There are lots of them, but no single explanation that is convincing. If anything stands out, it is that rising living standards reduce the need to have lots of children (i.e., you don't need their help to bring in the crops). I think also that it is very expensive to raise kids these days, and tax burdens don't make it any easier. On the contrary.

Tom: In an economy with an increasing population, a business could have a stable market share and still increase its sales and revenues. Everyone can grow. But with a declining population that can't happen. If one grows, another must shrink. Also, a declining population society is like a country without a frontier--no need to expand and no way to expand.

A final thought. Wattenberg argues that the U.S. should encourage immigration in order to "solve" this problem. But my take is that declining fertility is here to stay, and will probably continue, and so everyone is going to face this problem sooner or later. There is almost nothing that governments can do to reverse this trend which is now very obvious in virtually every country in the world. This is the new reality that no one expected and it is huge.

In regards to immigration and the need to compete for immigrants, in this particular discussion/scenario, what about the Hart-Celler Act of the mid 1960’s?

This particular Act changed the composition of immigration into the US vs. immigration policy prior to the Act. Specifically, this new composition of immigration after Hart-Celler created unintended consequences within the Labor Pool characteristics/attributes of immigration.

That immigrant Labor Characteristics after Hart-Celler tended to be much more unskilled vs. skilled labor at the very time the dynamics of the US Economy required more skilled labor (production was moving quickly toward capital intensive rather than labor intensive).

Hence if competition would intensify among nations in regards to immigration and purely in context of economics, doesn’t quality of Labor Skills of immigrants become a competeting issue to the pure quantity of immigrants?

Not true, Scott. A population can increase it's output without a growing population. All you need is a growing capital base. Everybody can become better off if people are sufficiently smart and energetic. The economy is never a zero sum game.

Tom: We are both a little wrong. I neglected to be more specific. If population declines by 2% a year and productivity rises by 2% per year (the long term average in the US), then the size of the economy doesn't grow, and you have the zero sum game I was referring to. It's certainly possible that the rate of population decline could exceed the growth in productivity, in which case the zero sum game becomes even more noticeable; in a shrinking economy, not expanding your market share would mean a slow death.

W.E.: you make a good point. On a related issue, have you seen that the quota for H1B visas (visas granted to skilled workers that US companies want to hire) has not yet been used up this year? In years past the quota was exhausted on the first day of the year. Demand for skilled workers has dropped precipitously, another sign that this has been a tough recession.

Re: H1B Visas seeking skilled workers at less than quota, not filled even in an elongated time frame.

Surely you are correct about the decreased demand for these skills during a major recession. However, with the expansion of Government Employment, possibly Government Jobs don’t demand much skill. Further, with Keynesian Government Deficit Spending deployed ($800 Billion Spruce Goose of a Stimulus Plan) the old phrase “creating work” with the associated example of one person digging a ditch and the other person filling up the ditch, the “creating work” phenomena doesn’t require much skill either.

We believe a fourth zone of South America should be added to your economic engines in the coming decades. In our opinion this would make the Americas the region of dominance over the next 50 years.

The Economist article fails to put specific numbers on the impact this will have on certain countries in coming years. We list below the declines that Japan, UK and Italy will face below and compare this to the U.S.:Declines in the key economic age brackets from 2010 to 2025

Japan 31 to 35:-31.8% 36 to 40:-33.2%41 to 45:-13.5%

UK31 to 35: 14.8%36 to 40: -6.3%41 to 45:-23.5%

Italy:31 to 35:-25.4%36 to 40:-36.6%41 to 45:-35.8%

The declines or not around the globe in the next 15 years will have a dramatic impact on countries influence on the world stage. It may surprise many that the U.S. does not face such a challenging decline.U.S.:31 to 35: 23.2%36 to 40: 14.5%41 to 45: 1.3%

logie: thanks for the stats on the U.S. That reinforces the point that the U.S. will remain a dominant player on the world stage for some time to come. If Latin America can fix its seemingly chronic problem of terrible government, then it will be very well positioned to grow in the future. Brazil has been surprising everyone for years now, and Chile has been doing a decent job also. Unfortunately, Venezuela and Argentina, and to some extent Mexico, are headed in the wrong direction. Bad Government is perhaps the biggest natural disaster in the region, and it keeps striking with a regularity that is depressing.

logie: I have been hoping to see improvement in Latin America ever since I lived there in the late 1970s. I have seen two periods of relative prosperity in Argentina, one during the military years of 1976-1980, and one during Menem's administration. I'm hopeful there will be another in my lifetime, and that it will endure. But I'm not willing to risk any money on that hope. True change in Latin America needs to come from the people. There needs to be an uprising or revolution of sorts against bad government. And perhaps most importantly, there need to be some good people leading the charge. Do you know of any?

Scott, The more I try and learn about this business, the more I realise how little 'the experts' know and this includes myself.The stock market leads the economy in most things and therefore I am sure that the stock market will continue to confirm or not of the improving political landscape of Latin America in the coming decade.All I can do is to spend my time in trying to measure how the South American markets are performing relative to the world.However it would appear that how goes Brazil is how goes the continent?